Wall Street's top banks are rushing back into the lucrative market for leveraged buyouts to reclaim business from private creditors.
Banks are committing financing for a slew of new deals — from the $1 billion loan for the purchase of book publisher Simon & Schuster to the roughly $1.7 billion of debt for the acquisition of packaging firm Veritiv. They can win this business, in part, because they've cleared out so much of the older debt stuck on their books that made it harder to compete for new offerings.
Investors, meanwhile, are eager to buy syndicated loans, which gives banks more confidence in bidding for deals. Competition is fierce: There's been just $13.3 billion of leveraged buyout loans issued so far this year in syndicated markets, versus $65 billion in the same period of 2022, according to JPMorgan Chase.
"Money is coming flying into credit," said Richard Zogheb, head of global debt capital markets at Citigroup. "The real challenge is creating supply."
Demand for high-yielding assets has been soaring as the US economy proves resilient in the face of the Federal Reserve's most aggressive monetary tightening in decades.
"There's a face-off between private lenders and the syndicated market for leveraged buyout transactions," said Kim Harris, a partner and portfolio manager in liquid and structured credit based at Bain Capital Credit. In the end, private equity sponsors are "going to go with whoever has the best execution."
Banks, though, have gotten a boost in confidence in the wake of deals like Apollo Global Management's acquisitions of aluminum products maker Arconic and chemical company Univar Solutions. Both deals were met with strong demand from investors.
Chris Blum, head of corporate finance at BNP Paribas, said banks have been able to use the success of recent transactions as a way to credibly propose other deals to their risk committees.
That, and the Fed's current fight against inflation, means investors are more willing to support transactions with lower leverage and more lender-friendly documentation — especially to firms with a credit rating equivalent to a B2 or above from Moody's Investors Service.
But not every transaction is ready to rely on bank lending. While banks can often offer more-attractive initial pricing than private creditors, they'll sometimes rely on step-up clauses that increase costs if transactions take longer to close.
"You could get stuck in transactions for some time," said Zogheb of Citigroup. "Especially given the current regulatory environment."
Private creditors, meanwhile, can offer a firmer guarantee on pricing. Banks lost out on a recent €1.5 billion ($1.65 billion) loan package to help fund the buyout of Constantia Flexibles GmbH, with financing instead coming from private lender HPS Investment Partners.
